Last week's interest rate cut by the Federal Reserve is not expected to have much impact on the moribund high-yield bond market.
"I wouldn't look for the market to be rescued by a rate cut," said Martin Fridson, Merrill Lynch & Co.'s high-yield strategist. "But I do see the fact that stocks rallied on it as more of a positive rather than a negative for junk bonds."
The junk bond market tends to track the stock market more closely than it does the credit market, especially in a downturn, market observers said.
But it takes time for the junk bond market to catch up to stock trends.
What could cause a turnaround in high-yield bonds-whose new issuance has shrunk dramatically in recent months-would be a sustained renewal of domestic growth.
But as long as widespread fears remain that the economy may slip into recession, junk bonds are unlikely to recover.
Ironically, the Fed's most recent rate move may undercut the confidence of junk bond investors. "Coming so quickly on the heels of the other rate cut, some bond investors wonder, 'What does the Fed know that we don't know?'" Mr. Fridson said.
Just one new junk bond issue was priced last week, underscoring the market's sharp dropoff from its robust level of new issues in the first half.
Cogentrix Energy Inc., a family-owned energy company based in Charlotte, N.C., issued $300 million on the private junk bond market Thursday. The 10- year bonds pay 8.75% over comparable Treasuries and were priced at a slight discount of 0.482% below par, giving buyers an 8.823% yield.
It was nice timing for investors because the issue was priced just before the Fed's announcement of a rate cut. After the Fed move, the new bonds traded up 13 basis points.
Bond prices move in the opposite direction of interest rates, so investors received a modest boon just hours after pricing.
The issue was underwritten by Citigroup's Salomon Smith Barney unit, Goldman, Sachs & Co., and CIBC Oppenheimer Corp.
"Utility companies are a good defensive play in this market," said Margaret D. Patel, portfolio manager of a high-yield bond fund for New York-based Third Avenue Funds.
Ms. Patel said she did not invest in this deal but only because she does not invest in the bonds of privately held companies.
